This is why we keep talking about the global financial crisis…

December 5, 2017 | Kim Iskyan

It was the financial equivalent of WWII or the Vietnam War for this generation… although few people realised it at the time.

A few years ago, no one knew that the 2008-2009 global financial crisis was going to have such a deep, broad and lasting impact. In the crisis, economies across the world contracted and markets all over the globe crashed. From 2007 peaks to 2009 lows, the S&P 500 – the U.S. benchmark index – fell 57 percent. Over the same period, the MSCI Asia Index fell 59 percent. And the MSCI All-Country World Index fell 60 percent.

And that was just the beginning.

Then the U.S. housing market tanked – with prices falling around 30 percent. Big banks failed and had to be bailed out. Companies slashed jobs, unemployment jumped and people lost their houses.

Even now, around 10 years later, we’re still talking about whether or not economies and markets have recovered since then.

Why?

Contrary to expectations, both in the thick of it and for years afterward, this wasn’t a garden-variety correction. Most importantly, economic growth nose-dived… and has never really recovered.

Just take a look at the chart below. In 2011, more than a year after the end of the global economic crisis, consensus forecasts suggested that the world gross domestic product (GDP) would grow 4 percent in 2012. They also predicted growth in 2013 and 2014 to be around 4.5 percent. And according to the experts, the global economy should have seen nearly 5 percent growth by 2016.

But in reality, the world’s GDP only grew around 3.5 percent in 2012, and less than that in 2013 and 2014. And by 2016, world GDP growth was down to just above 3 percent. Put together, that’s enormous underperformance relative to expectations.

In the following years, the excessive optimism continued. In 2013, the consensus forecast for global GDP growth in 2015 and 2016 was 4 percent. Actual growth was a full one-quarter lower, at 3 percent.

The next chart shows growth forecasts versus actual growth in advanced economies like the U.S., U.K. and Japan.

As you can see, predictions continued to be detached from reality. In 2011, forecasts called for advanced economies to grow more than 2 percent in 2013 and by more than 2.5 percent from 2014 to 2016. But in reality, GDP growth fell to around 1.25 percent in 2013 and only reached 2 percent in 2015.

The common ground in all of this

For starters, these charts show just how wrong forecasts can be.

More importantly, these incorrect forecasts show that the global economy has recovered far, far slower than anyone thought. For example, it has taken a full decade for U.S. median real (inflation adjusted) household income to surpass where it was back in 2007. And we still haven’t recovered completely yet. Many economies around the world have yet to get back to where they were in 2007.

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In other words, many families all over the world are still waiting for a recovery.

Rich pessimism…

Ordinary families in the developed world in particular are pessimistic about the future. For many, in the context of this “recovery”, the future is tainted by the recent past.

Take a look at the following survey by the Pew Research Center, which posed the question: “When children today grow up, will they be better off financially than their parents?” to respondents from countries all around the world.

But just look at which countries are the least optimistic about the financial futures of their children. Japan, France, the U.K., and then the U.S. and Germany all rank incredibly low. The pessimism is clearly skewed towards the “wealthiest” countries on Earth.

As for the most optimistic nations? Well, they are all fast-growing developing nations, often with large youthful populations.

Four of the top seven are Asian countries. That includes Vietnam, India, the Philippines and Indonesia – with annual GDP growth rates of around 6.2 percent, 7.1 percent, 6.9 percent, and 5 percent respectively.

At this point, you’re probably wondering where China falls in this optimism survey. Well, my guess is Pew probably struggled to get this survey done in China, and that’s why there’s no China figure in the poll. After all, it’s a pretty sensitive question to ask for the Chinese government. But I’d place a bet on China reporting optimistic results.

It’s clear that people living in emerging markets are optimistic about their futures. And so are we.

If you’re looking for an easy way to participate in faster-growing developing equity markets of the world, then take a look at the SPDR S&P Emerging Asia Pacific ETF (New York Exchange; ticker: GMF).

It’s weighted around two-thirds towards China (where we remain extremely bullish) and Taiwan, with the remainder allocated towards India, Thailand, Indonesia, the Philippines, Malaysia and a few others.

Good investing,

Kim IskyanPublisher, Stansberry Churchouse Research

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.

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